CME Makes Statement of Intent on FX Clearing

Craig Donohue, CEO of CME Group, made the keynote address at Profit & Loss’ Forex Network Chicago last week and unveiled what sources close to the Merc refer to as a “statement of intent” over its plans for OTC clearing.

Addressing a standing room-only audience in Chicago, Donohue told delegates that CME Group has two “very significant platforms that address current market and regulatory needs” in CME Clearing House and CME ClearPort.

“We are in the process of expanding the benefits of CME ClearPort to FX, thereby increasing the reach of our services in the OTC arena,” Donohue said. “We are developing a flexible, secure clearing service for the global OTC FX market. This will be a post-execution clearing solution for OTC FX transactions that will combine the flexibility and user-choice of the OTC market with the risk management benefits of a clearing house.

“This clearing mechanism virtually eliminates credit risk, reduces operational risk, and lowers costs for market participants,” he added. “Our clearing service will cover all the products within FX, including FX spot, forwards, swaps, and NDFs. The bottom line is that CME’s OTC FX clearing service will allow users to trade what they want, where they want, and how they want – and clear it with CME Group.”

The role of clearing of OTC products has been in the spotlight ever since the collapse of Lehman Brothers in September 2008 and while regulators seem to be focusing mainly on the credit default swap market, it is seen as inevitable that certain FX products will be encompassed in new regulation.

On the subject of regulation, Donohue told delegates that “there are some segments of our financial market system that provided a place of shelter from the most damaging parts of the global economic crisis – futures and options markets are chief among them.

“They functioned flawlessly – providing liquidity, transparency and central counterparty clearing services that work,” he continued. “Throughout the crisis, there were no clearing member defaults and every customer was fully protected at all time. Therefore, it is important that regulators recognise the value of well-regulated markets; they are safe, sound, secure and reliable.”

Donohue was also quick to point out CME’s belief that the OTC markets remain a key element of the industry, telling delegates: “While many focused on vilifying the role of the OTC markets in the crisis, we instead believe that some OTC markets functioned relatively well. Throughout the crisis, we have been reminded that OTC markets are complementary to and have a symbiotic relationship with exchange-traded markets. Therefore, we do not favour artificial and prescriptive government action, such as mandatory clearing. Rather, we support legislative policies and regulatory frameworks that promote market integrity, customer protection, and the ability of the financial system to function without governmental support.

“Finally, we must all be cognisant that regulatory frameworks in the US must always allow exchanges, brokers, and other financial intermediaries to compete globally. As we go forward, these are the types of principles that we will promote and defend,” he added.